QE3 is a tipping point to me. It hit me with the reality that we are going to be in this low interest rate world for the long haul. Instead of taking a punch in the face, I resolve to fight back. I’m tired of getting paid a puny amount on my money. I’m going to pull out all the stops and maximize my advantages as an individual investor.
Yes, you read that right. When it comes to investing, institutional investors usually have the upper hand. However, as individual investors we also have our own unique advantages. I’m going to show you each one of them and help you take full advantage of them.
Here’s my goal: double the bond yield without more risk. I want to double my bond yield. If you take the same steps I take, chances are you will double your bond yield as well. I’m going to call this effort “BY2” as in “bond yield times 2.”
Is that even possible? It’s not possible unless you try. We can’t be complacent any more. I have a sense my readers have well-above-average wealth. I’m going to set the bar high for my pursuit, really high. Suppose a married couple has a $1 million investment portfolio, 40% of which is invested in bonds. I want to double the bond yield for this couple without taking more risk than they already do.
The SEC yield on Vanguard Total Bond Market Fund Admiral Shares is 1.7%. To reach my goal, I need to find $1 million * 40% = $400,000 invested in bonds * 1.7% = $6,800 worth of additional opportunities in one year. That’s $3,400 per person. If I can make or save extra $3,400 per person for this hypothetical couple, I will have doubled their bond yield. If you don’t have $400,000 invested in bonds, when you make or save $3,400 per person, you will have more than doubled your bond yield.
Extra $6,800 for a couple with $1 million invested is a big deal. Any portfolio manager or financial advisor would kill to outperform the benchmark by 0.68% a year.
To borrow some business-speak, doubling the bond yield will be my BHAG — Big Hairy Audacious Goal. Finding ways to make or save $3,400 per person in the next 12 months will be my KPI — Key Performance Indicator.
I also have some rules for this endeavor:
(1) I want to make money with money, not with labor. So I’m not going to suggest that everybody should start a dog walking business or work an extra shift to pick up some more income.
(2) I assume they are already comfortable with their spending. I’m not going to suggest they stop buying a Starbucks latte every day because (a) they probably don’t buy it every day and (b) when they do I assume they enjoy the latte.
(3) Any effort involved had better be either one-time or automated. If it requires doing something on a recurring basis, it must not take more than 10 minutes per month. I’m not going to have them hunt for grocery coupons in Sunday papers every week and look for stores that have the same products on sale so they can layer coupons on top of sale.
(4) Don’t take more risk. I will favor guaranteed return over risky investments such as dividend stocks even though dividend stocks have potential for higher returns. If I do take more risk than say the Vanguard Total Bond Market Fund, it has to be a calculated risk and it has to involve a very small percentage of the portfolio.
(5) In order to count against the $3,400/person KPI, it can’t be something too obvious. I’m not going to suggest that my hypothetical couple should pay off credit card debt and save 19% interest because I assume they don’t have credit card debt at 19% interest rate. I’m not going to suggest that they move away from actively managed funds with a 2% expense ratio to index funds because I assume they already invest in index funds.
Advantages As an Individual
So what advantages do we have as individual investors? Let me give one example.
US Treasury sells I Bonds only to individual investors. By the established laws and regulations, the fixed rate is not allowed to go below zero. At the same time, the yield on comparable 5-year TIPS is negative 1.5%. That’s 1.5% extra yield institutional investors can’t have.
Yes, there is a maximum investment of $10,000 per person plus another $5,000 per tax return, but $25,000 a year is a much more meaningful number to our hypothetical couple with $400,000 invested in bonds than it is to institutional investors with millions and billions to invest. If they buy $20,000 worth of I Bonds now and another $5,000 at tax time next year, they will make additional $25,000 * 1.5% / 2 = $188 per person.
In addition, as I wrote last week, by moving $1,500 from their emergency fund to a new checking account with Citibank and Chase respectively, each of them will make ($150 – $15) + ($200 – $15) = $320. See previous post A Basic Checking Account That Pays More Than A High Yield Savings Account. Citibank and Chase are not giving a 10% bonus to institutional investors, but we as individuals can get the extra return. [Update: Both Citibank and Chase promotions expired now.]
You see just after these two moves I’m already 15% complete toward the goal. We will get there. Join me in this journey. Let’s do it.
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